Providing an Emergency Savings Account (ESA) is fast becoming a way to help provide a foundation for financial well-being. With 37% of respondents reporting they would be unable to fully cover a $400 unexpected expense in 2019, according to a Federal Reserve report providing an emergency savings program that’s easy and accessible helps tell your workforce that you know what they’re going through and you’re there to help.
That said, HR professionals who are already managing an ESA, in the process of introducing one, or considering a rollout all face a basic yet important question: How much should their employees stash away in these accounts?
Clearly, employees themselves have the final say. But an efficient plan structure with appropriate minimums, maximums, and matches; solid guidance; and accessible educational efforts can go a long way toward spurring engagement and helping workers make the most of this important benefit. Let’s take a closer look.
Finding the ESA Sweet Spot
When offering guidance on how much to save for emergencies, employers may want to aim for the “sweet spot.” That’s somewhere between essential short-term savings and a continued focus on long-term financial goals, especially during times of economic uncertainty.
Finding this can be tricky. Take ESAs and 401(k) savings, which often have a direct effect on each other and present HR professionals with a bit of a conundrum.
On the one hand, ESA savings can improve overall financial health and help employees avoid withdrawing funds from their 401(k) savings early, preventing any potential tax penalties and lost income in those accounts.
Having the cash stashed away to weather financial upheavals can also add to employees’ long-term financial well-being. People with ESAs are 2.5 times more likely to be confident in their long-term financial goals, according to an AARP Public Policy Institute report .
But by the same token, too much emphasis on short-term savings may dampen employees’ willingness to save in traditional retirement accounts. This is especially true in light of the pandemic, when many employees may have taken some short-term financial hits, leaving them with fewer resources to save for the long-term. In fact, one in three Americans have decreased or stopped their contributions to retirement savings due to COVID-19, according to a 2020 survey of 1,000 U.S. adults conducted by FinanceBuzz .
Employers can help workers balance this short-term/long-term financial tension by helping them understand their individual savings needs, goals, and risks of encountering unexpected expenses.
Rethinking Conventional Wisdom about Emergency Savings
One way to do that may be to look beyond the traditional advice concerning emergency savings. Financial institutions, such as Vanguard and Fidelity, often recommend that clients save three to six months’ worth of expenses (or more) in a cash or cash equivalent account in case of a job loss, medical issues, or other income disruptions.
But some experts believe that lower-, moderate-, and even some high-income workers may be discouraged by that goal and give up on emergency savings altogether. Setting more achievable dollar figures such as $500 or $1,000 may be more realistic and more motivating than the traditional advice. And this approach can still help maintain the employee’s financial well-being. The median medical expense reported by respondents in the Federal Reserve survey was between $1,000 and $1,999.
To get employees started, encouraging them to save realistic amounts for common unexpected expenses may offer them a more accessible goal than the three-to-six months’ worth of expenses formula.
Keep in mind, the “goal” for emergency savings is fluid. The idea is for your employees to build a cushion, use it as needed, and then replace those funds and build the account some more. That’s why a hard-and-fast number doesn’t always work. Focusing on regular contributions that keep the fund functional can be more important.
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Calculating Minimums, Maximums, and Matches
Benefit design can go a long way toward motivating employees to engage in emergency savings. Flexibility is key.
Minimums and Maximums. When you’re setting up a savings benefit of this kind, there are usually minimums and maximums involved. In many cases, employers work with an outside bank/vendor that may have its own restrictions. You may also want to impose some structure to run the program efficiently and engage your employees.
Keep in mind, minimums need to be low enough to engage, not overwhelm, workers. Amounts as low as $25 to $50 a week are not uncommon. Once the momentum starts and employees see balances increasing, they may want to increase the amount they’re depositing. Make sure this process is easy for them to do. And remember that flexibility is key. If an employee must miss a month, consider not imposing any penalties. Otherwise, you may discourage an employee who happens to be temporarily strapped that month but who does want to save.
Maximums can be an important tool in ensuring that employees aren’t overly focusing on short-term savings or disregarding their 401(k) and other long-term savings goals. You’ll want to use the tools and information outlined above to set a thoughtful maximum that will help employees successfully cover unexpected expenses and, at the same time increase their confidence for long-term goals.
When determining maximum amounts, you’ll also want to consider whether excess contributions can spill over into other types of saving programs, such as after-tax retirement contributions. This requires more administration but can be a useful tool to help employees balance short and long-term savings goals.
Auto-Enrollment. HR professionals have seen how automatic enrollment in 401(k) plans has significantly increased participation. The same may hold true for auto-enrollment payroll deduction ESAs, in which a small portion of each employee’s paychecks is automatically deposited into an employer-sponsored account. Recent Consumer Financial Protection Bureau guidance easing government restrictions has made it easier for employers to implement automatic enrollment for emergency savings.
Using the information outlined above to determine the percentage deducted for each level of your workforce can help make these automatic payments accessible and sustainable.
Employer Match. Kicking in an initial amount to help employees get their emergency fund started or offering a match tied to employee contributions can provide a strong incentive for employees to start saving.
One company might match employee contributions up to $40 a month. Other employers may provide a contribution once the employee has hit a certain savings threshold like, say, $250. For a relatively low cost, your company can provide a match that can help employees hit their emergency savings targets faster, improve their engagement, and enhance their overall financial wellness.
SoFi at Work can help you and your team implement a successful emergency savings program, including guidance on how much your employees should save for unexpected expenses.
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